This paper estimates the Aid-for-Trade (AfT)-export elasticity from the donor perspective, using panel data for covering 45 donor countries and 140 recipients over the 2002–2019, focusing on the top-five donor countries: Japan, Germany, France, US, and UK. The method involves estimating a gravity equation with the Poisson pseudo-maximum likelihood (PPML) technique. We find that the mean AfT-export elasticity for the 45 donor countries is zero, but the elasticity for Japan is positive and large. In particular, the findings suggest that Japanese AfT generates net export expansion from the receipient countries, in contrast to Aft from the other top donors that expands net imports from these countries. We further examined the potential mechanism behind the export creation effect of the Japanese AfT using unique contract data on wouldwide infrastructure-related projects in which Japanese AfT is heavily concentrated. The results suggest that the Japanese infrastructure-related AfT works as an informal tying arrangement that closely link aid to donor exports. The focus of Japanese AfT on economic infrastructure offers a model to achieve mutual benefits for both donor and recipient countries.
Keywords: Aid-for-Trade; Gravity equation; Poisson pseudo-maximum likelihood estimator; Japan; Donor export JEL codes: F35, F14, O11